Want to know the answer? It’s paying down debt.
In the current issue of “Moneywise” there’s one of their regular “Money Makeover” features. Wendy Edwards from Surrey and her partner Marc were being advised by Ian Anderson of G C Stevens Financial Services in Weybridge.
Apart from their mortgage, they had loan and credit card debts totalling over £21,000, to be serviced from a combined net income of £2300 / month. However they also had £9000-odd in various savings accounts “earning them little interest.”
One of the first tips from the adviser – which “Moneywise” highlighted in a text-box – was to use the savings to pay down part of the card and loan debt. By doing that he calculated they’d save £790 / year, which amounts to about 3% of their net income.
This reminds me of something I wrote in my book “Back to the Black”. Here’s an extract:
Don’t keep rainy day money
Do you have any savings? You might answer: “are you crazy? I’ve used them up long ago.” However, many people who are facing severe debt problems, and are “maxed out” on their credit cards, turn out to have money squirreled away in another account, “for a rainy day”. (I was one of them) Well, as this is a rainy day, (and right now you are earning very little interest on those savings) it makes no sense to hold on to savings at the same time as you have unsustainable debts.
That statement is not original. In 2007, an article in the money pages of the “Daily Telegraph” concluded with the simple phrase, which I found it hard to argue with but hadn’t realised before:
“Paying down debt remains the best risk-free, tax-free investment in town.”
I suspect this is always true.